The Rebound Effect

Is the industry ready?

THE RECESSION REDUCED DEMAND FOR almost all products, including electricity. According to the U.S. Energy Information Administration's recent figures, total electricity consumption declined by 3.6 percent in 2009. This is much steeper than the 1.7 percent decline predicted by EIA in March.

The Electric Power Research Institute analyzed how previous U.S. economic recessions affected electricity consumption. The analysis reveals an important phenomenon that we call the rebound effect. A spike occurs in electric power consumption beginning in the early stages of economic recovery, driven primarily by the turnaround in the industrial sector. Utility decision makers – especially from entities with large industrial loads or those with deferred infrastructure projects – need to take note of this phenomenon, learn how it may affect their company, and prepare to take action to address it successfully.

During the early stages of past recoveries, many manufacturers with depleted inventories rapidly replenished those inventories, driving up energy consumption. During the rebound, demand typically overshoots normal pre-recession levels. This happened in four of the last seven recessions. Demand then remains high for some period of time, and then returns to the trajectory of historical load growth.

Depending on the magnitude of the rebound effect, utilities with delayed infrastructure projects may not be able to build new facilities fast enough to meet the upsurge in demand. In other words, consumption might increase faster than they can put steel in the ground.

There are three ways utility executives can prepare for the rebound effect.

First, since the magnitude and timing of the effect will vary among different service territories and regional economies, executives could engage their planning and economic teams to study the phenomenon and its potential impact on the utility's ability to reliably and economically satisfy customer demand. Watch leading indicators closely, and communicate with your largest customers to understand how and when they react.

Second, utilities could consider implementation of flexible resources such as demand response and energy efficiency to deal with the rebound consumption spike over the short term. If the rebound is predominantly load growth, the demand response provides a cushion during the transition period. Energy efficiency may be highly cost effective during the transition.

Third, executives could re-examine decisions to defer infrastructure upgrades and, if possible, begin moving forward with construction of the most critical assets. New substations, lines, peaking units and other facilities that were planned two years ago to meet a 1 to 3 percent annual demand growth will be needed when demand returns to pre-recession levels.

Perfect timing and perfect prognostication are impossible. But being prepared is just good business. If the past repeats itself, the 2009 recession will lead to growth for many utilities in 2010 and beyond and decisions made today will impact the industry's ability to reliably handle this rebound effect.

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